3 Steps to Calculate Retirement Savings You Need

Retirement planning begins with determining the amount of money you might require to support your lifestyle following retirement. You will be able to set realistic financial goals, and build a retirement corpus over time, if you know how to calculate retirement savings. The analysis of retirement savings includes the following steps: estimating how much will be needed in retirement, taking inflation into account, and figuring out what investments are necessary to close the gap. Taking a step-by-step approach to retirement planning can help build a retirement plan.

Step 1: Calculate your expenses

You can also use the retirement calculation formula given below, using your current expenses to estimate your retirement income needs:

Current Expenses = Current Income - Current Savings

For example, if your annual income is ₹15 lakhs and you save ₹3 lakhs every year, your current expenses amount to ₹12 lakhs.

You can start by listing your current expenses and omitting expenses that will no longer apply during retirement. This could be expenses like any loans/debt or children’s educational expenses you will have paid off by then.

Next, account for any early retirement activities like travelling, sightseeing and other bucket list expenses you plan to engage in.

Also, set up an emergency fund to account for any unexpected expenses during retirement, like medical emergencies.

Your withdrawal rate is a significant factor in determining if your retirement savings will last. Having an accurate estimate of your expenses after retirement is critical because it will affect how much you withdraw each year and how you invest in your savings.

If you understate your potential expenses, you may easily outlive your savings, or if you overstate your expenses, you may not be able to maintain your current lifestyle during retirement.

Step 2: Factor in inflation

Inflation is the biggest hurdle you need to overcome when calculating retirement savings.

Your money today will not hold the same value in the future. Hence, future living expenses may be higher or different post-retirement.

For example, if you are 30 years old, have an average annual expense of ₹5 lakhs and plan to retire within the next 30 years (at 60 years). With an inflation rate of 6.67% p.a. (India’s inflation rate in 2022), you would need around ₹34.6 lakhs per year to maintain your current lifestyle.

To make this estimation easier, you can use an Inflation calculator to estimate your retirement income needs. This is a free online tool that can help you factor in inflation without going through lengthy manual calculations.

Step 3: Factor in life expectancy

Thanks to modern medicine, the average life expectancy of modern Indians has invariably increased, averaging at around 70 years. Per the UN’s projections, this average is expected to increase to 80 years by 2100.

Moreover, people living in urban India have easy access to technology, the internet and the latest healthcare services. To make sufficient financial provisions for an extended life, you need investment tools that will help your money grow faster than the inflation rate.

Most people invest in mutual funds or other market-linked instruments2 to grow their portfolios. Some also buy retirement plans from insurers like Tata AIA that offer a monthly pension once you retire.

When you know how to figure out how much you should save for retirement, you can make better financial choices and feel more secure about your future financial needs when you retire. By estimating your retirement savings requirement and following a disciplined retirement planning strategy, you can build a retirement corpus that supports your lifestyle, meets your future financial needs, and helps you achieve greater financial independence after retirement.